(Asset replacement) Clarion Tools recently created a new product, a com¬ puter-controlled, laser-precise lathe, and Midwest Ornamental Metals is con¬ sidering purchasing one. Midwest’s CFO received the following information from the accounting department regarding the company’s existing lathe and the new Clarion lathe. The savings in operating costs offered by the new lathe would mostly derive from reduced waste, reduced labor, and energy cost savings:

a. Based on financial considerations alone, should Midwest purchase the new lathe? Show computations to support your answer.

b. What qualitative factors should Midwest consider before making a deci¬ sion about purchasing the new lathe?LO.1  

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Old Machine Original cost $575,000 Present book value $250,000 Annual cash operating costs $350,000 Market value now $100,000 Market value in 5 years $0 5 years Remaining useful life New Machine Cost Annual cash operating costs Market value in 5 years Useful life $700,000 $220,000 $0 5 years